SJP - VCT Guide

Research and due diligence Types of VCT Although all VCTs have the same structure and their investments are governed by the same rules, there are THREE common types of VCT. Generalist - which covers private equity, including development capital; Specialist sectors - for example, technology or healthcare; AIM - predominantly investing in companies issuing shares listed on AIM. Some VCTs previously operated as limited life VCTs. These aimed to invest capital and then wind up within 5-10 years. Given the new ‘risk- to-capital’ condition most VCTs now operate one of the above three strategies. However, within these categories, managers employ a wide range of investment strategies, with different levels of diversification, targeting different levels of growth and income, with different risk profiles and investing in companies at different stages of development. The most common type of VCT is Generalist, investing in unquoted businesses with no sector preference. 39 38 RESEARCH AND DUE DILIGENCE RULES FOR VCTS Typically, VCT managers will deploy an investor’s subscription across multiple companies. The target number varies by manager, but typically is between 30 and 60. It is also important to diversify a client’s VCT investments across different VCT fund managers and VCT offerings. There are varying methodologies for selecting potentially successful investments across managers and the objectives and strategies of investment offerings also vary. ”VCTs are switching from management buy-outs to invest in younger, higher-risk businesses looking for capital. Such businesses may be based on new technology, and this may attract younger investors”. GEORGE BULL, SENIOR TAX MANAGER, RSM UK PROS CONS GENERALIST VCTs Predominantly investing in unquoted companies (excluding companies on AIM) across a broad range of sectors • More influence on investee companies • Not generally correlated to AIM • Lower liquidity AIM VCTs Predominantly investing in companies issuing shares on AIM • Greater liquidity • High diversification • Publicly available information on investee companies • Managers are not the dominant shareholder SPECIALIST VCTs Predominantly investing in a specialist sector, for example technology or healthcare • Specialist skills and technical knowledge • Not generally correlated to AIM • Can be less diversified Liquidity and investment horizon Although VCTs are listed, their shares can suffer from low levels of liquidity. In addition, the minimum holding period to qualify for the upfront income tax relief is five years. Therefore VCT investments should be viewed on a five to ten year investment horizon. If clients anticipate an urgent need for their investment capital at any point sooner than this, they should be advised against investing in VCT shares. Knowledge and experience Investors (or their representatives) must have the capacity to understand the nature of VCTs and the associated risks. In general VCT investors will have experience of investing in a portfolio of more conventional retail investment products, and/or experience in business or a profession and, therefore, be in a position to make informed decisions about investing in VCTs. Portfolio balance and diversification It is highly unlikely that it would be appropriate for a client to concentrate their wealth in VCTs and, in the majority of cases, VCT investors will already have a substantial portfolio of conventional investments that meets the majority of their investment objectives. Investors should not be over-exposed to high risk investments, illiquid assets or unquoted securities. The risks and disadvantages of VCT shares should be more than offset by the rest of the portfolio.